Monday, 23 March 2009

Inheritance tax: time to make the case

Its been one of those rare mornings when I bought The Daily Telegraph. The front page story is on Ken Clarke's announcement that the Conservative commitment to raise the threshold for inheritance tax (IHT) to £1m is now an 'aspiration' , not something that will be enacted as soon as the party gets into office. The Conservatives have moved rapidly to 'clarify' the official position, with Alan Duncan insisting on the Today program that the proposal will be in the party's manifesto for the general election and will be enacted within the first term of a future Conservative government.

For those of us who have made the case for inheritance tax as a crucial instrument in promoting greater equality of opportunity, Clarke's intervention is potentially good news. Its particularly interesting to look at the detail of what Clarke said. Insofar as he supported the existing policy it was in these terms:

'We think there is a case to be made for making sure inheritance tax doesn't catch people caught by house price increases.'

First, note the phrase 'a case to be made'. Hardly a ringing endorsement of the proposal to raise the IHT threshold.

Second, consider how Clarke construes the problem: 'making sure inheritance tax doesn't catch people caught by house price increases.' That's a bit vague, but the most reasonable reading of it is probably something like this: in recent years, many people have seen their housing wealth creeping up to, say, £300,000-£400,000; these people shouldn't be liable for any inheritance tax. But this concern does not obviously support raising the theshold all the way to £1m. Indeed, given that Labour has already raised the threshold (for couples at least) to well above the £300-£400k level, its not clear that the concern justifies any further increase in the threshold at all. The recent fall in house prices reinforces this point.

So it is reasonable to construe Clarke's comments not only as a call for temporarily shelving the proposal to raise thresholds to £1m, but as an implicit call for moderating the policy even as a long-term 'aspiration'.

But let's not get carried away.

For one thing, it seems that Clarke is speaking for himself, not the Conservative party. Clarke's comments perhaps represent a salvo in a battle within the Conservative party, but not a definitive statement of policy. As noted, the party leadership, including George Osborne's office, has been quick to reaffirm that the policy will be in the election manifesto and enacted within the term of a future Conservative government.

Moreover, even if this does lead to a real policy shift, it has not happened because Labour, or the wider left, has got out there and made the argument for inheritance tax.

There is a strong case in general terms for inheritance tax, set out by Rajiv Prabhakar, Karen Rowlingson and myself in the Fabian Society pamphlet, How to Defend Inheritance Tax. But the recession offers an opportunity to make a more specific case - a case it would be nice to hear from some Labour MPs:

At a time when many people are losing their jobs and facing economic insecurity, and vital public services are shortly to face a severe financial squeeze, why should the relatively affluent get a tax cut?

What kind of political party makes tax cuts for the affluent a 'priority' when so many are struggling so hard economically and public services are shortly to face a severe spending squeeze?

(Of course, the basic point that IHT cuts are inequitable is always true - but recession makes the inequity of cutting IHT even more obvious.)

I suspect that Ken Clarke gets this. It is a pity - and one that speaks volumes about the reality of so-called 'Progressive Conservatism' - that his party does not.